Loan sharking isn’t new, but it’s become a growing problem for regulators and prosecutors trying to clamp down on illegal, unethical lending targeting the poorest in society.
Mashonisas (the common South African term used for a loan shark) are common in South Africa, with as many as 40,000 unregistered credit providers regularly charging their contract-abiding customers between 30% and 50% interest. Source: The Mashonisa Informal Lending Report from Wonga.
Threatening or violent debt collection approaches, soaring charges, and a lack of consumer protection make loan sharks a high-risk way of accessing immediate finance.
The outcomes are a warning to other countries with a growing debt crisis.
What is a Mashonisa?
The term loan shark is known everywhere, whereas Mashonisa is particular to South Africa.
It means ‘to sink’ because illegal lenders sink their customers into such an enormous debt that they may never pay back the loan or recover financially.
Many believe that when you resort to a loan shark and give a Mashonisa control of your bank account, they have you in their grip – and won’t let go.
Unregistered lenders can charge astronomical amounts.
The averages are 30%-50% but can be upward of 100% or even 200% of the debt, which could be impossible to repay on a normal salary.
Mashonisas thrive because, in a cost of living crisis, they are perceived as a quick and easy solution for people who don’t see another solution or need immediate credit that they can’t get – or don’t think they will – from a regular bank.
The process varies, but most customers must give the Mashonisa access to their bank account, from which they will automatically take funds.
Credit traps spring quickly, so when a person doesn’t have sufficient cash to cope with essential living costs, they roll the loan forward or take on more debt, and the problem intensifies with extreme consequences.
What Are the Laws Around Loan Sharking?
One of the biggest problems with tackling loan sharks is that there are no other schemes or products to support those living in poverty or trying to cope with massive debts.
However, you can take steps to report criminal lending or seek assistance with extracting yourself from an unregulated debt.
In the UK, lenders must be authorized by the Financial Conduct Authority (FCA) to offer consumer loans. You can verify the authenticity of a lender via the FCA website and follow guidance from Citizens Advice about what to do if you owe money to a loan shark.
The practice of predatory lending is also prohibited in South Africa, and victims of loan sharks can report the incident to the National Credit Regulator (NCR) – but the reality is that it’s a widespread problem that is culturally ingrained among the poorest demographic of the South African population.
Loan sharks break regulatory rules around disclosing borrowing terms, capping interest, and conducting affordability assessments, but it’s often the associated debt collection practices that are most concerning.
From withholding passports to physical violence, intimidation to financial control, many loan sharks adopt threats and blackmail to extort as much money as possible from people who already have none to spare. In most instances, the lender is actually your neighbor, living in the same community as you and your family. This makes escape impractical and intimidation all the easier and more dangerous.
What Do We Need to Learn About Tackling Loan Sharks?
One of the most obvious ways to reduce the prevalence of loan sharking or stop new illegal lending businesses from developing is to increase education.
Financial illiteracy is a huge issue. Millions do not understand the debt they are taking on, how compound interest works, or the difference between a regulated bank and an unofficial credit provider. The presence of Mashonisas in South Africa is a prime example.
Although criminal debt recovery actions are clearly wrong, many people rely on loan sharks for survival or distrust the conventional lending system to the extent that they wouldn’t consider approaching a bank.
Practical, actionable steps include:
- Providing accessible financing through legitimate providers, in a way that includes those without internet access or deposit accounts which are excluded from most traditional borrowing structures.
- Enforcing the powers of regulators to take steps to prosecute illegal lenders and act as a preventative authority reduces the likelihood of new loan sharks setting up shop.
- Implementing education initiatives to help people on low incomes or in debt understand things like budgeting, applying for social security benefits, managing loans, or ways to control their outgoings.
The challenge is that a Mashonisa isn’t always the stereotypical ‘street thug’ you’re picturing in your head and can be an otherwise friendly seeming person in the community. This advice is replicated globally, where people fall foul of loan sharks due to a misplaced trust in informal lenders they otherwise considered upstanding citizens – hiding a dark truth.
How Can Education Stop the Rise of Illegal Lending?
Knowledge is power, and if everybody worldwide knew the difference between a loan shark and a respected lender, loan sharks probably wouldn’t exist.
Learning how to manage your finances is a vital life skill, yet one that is rarely included in national curriculums or taught at the school level to equip children with a baseline of understanding.
Education workshops provide people with valuable know-how about managing money, knowing where to find help, and avoiding the spiraling debt problem that will only ever worsen with input from a loan shark.